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Jel Classification:G38 

Working Paper
Causal Impact of Risk Oversight Functions on Bank Risk: Evidence from a Natural Experiment

Our goal is to document the causal impact of having a board-level risk committee (RC) and a management-level executive designated as chief risk officer (CRO) on bank risk. The Dodd Frank Act requires bank holding companies with over $10 billion of assets to have an RC, while those with over $50 billion of assets are additionally required to have a CRO to oversee risk management. The innovation that allows us to document a causal impact is our research design. First, we use the passage of the Dodd Frank Act as a natural experiment that forced noncompliant firms to adopt an RC and appoint a ...
Working Papers , Paper 19-01

Working Paper
Risk-Shifting, Regulation, and Government Assistance

This paper examines an episode when policy response to a financial crisis effectively incentivized financial institutions to reallocate their portfolios toward safe assets. Following a shift to a regime of enhanced regulation and scaled-down public assistance during the savings and loan crisis in 1989, I find that thrifts with a high probability of failure increased their composition of safe assets relative to thrifts with a low probability of failure. The findings also show a shift to safe assets among stock thrifts relative to mutual thrifts, thereby providing evidence of risk-shifting from ...
Research Working Paper , Paper RWP 19-10

Working Paper
Beyond the Doomsday Economics of “Proof-of-Work” in Cryptocurrencies

This paper discusses the economics of how Bitcoin achieves data immutability, and thus payment finality, via costly computations, i.e., ?proof-of-work.? Further, it explores what the future might hold for cryptocurrencies modelled on this type of consensus algorithm. The conclusions are, first, that Bitcoin counterfeiting via ?double-spending? attacks is inherently profitable, making payment finality based on proof-of-work extremely expensive. Second, the transaction market cannot generate an adequate level of ?mining? income via fees as users free-ride on the fees of other transactions in a ...
Globalization Institute Working Papers , Paper 355

Working Paper
Shareholder activism in banking

This paper conducts the first assessment of shareholder activism in banking and its effects on risk and performance. The focus is on the conflicts among bank shareholders, managers, and creditors (e.g., regulators, deposit insurer, taxpayers, depositors). This paper finds activism may generally be a destabilizing force, increasing bank risk-taking, but creating market value for shareholders, and leaving operating returns unchanged, consistent with the empirical dominance of the Shareholder-Creditor Conflict. However, during financial crises, the increase in risk disappears, suggesting ...
Research Working Paper , Paper RWP 15-9

Report
CoVaR

We propose a measure for systemic risk, ?CoVaR, defined as the difference between the conditional value at risk (CoVaR) of the financial system conditional on an institution being in distress and the CoVaR conditional on the median state of the institution. Our ?CoVaR estimates show that characteristics such as leverage, size, maturity mismatch, and asset price booms significantly predict systemic risk contribution. We provide out-of-sample forecasts of a countercyclical, forward-looking measure of systemic risk and show that the 2006:Q4 value of this measure would have predicted more than ...
Staff Reports , Paper 348

Report
Government Guarantees and the Valuation of American Banks

Banks' ratio of the market value to book value of their equity was close to 1 until the 1990s, then more than doubled during the 1996-2007 period, and fell again to values close to 1 after the 2008 financial crisis. Sarin and Summers (2016) and Chousakos and Gorton (2017) argue that the drop in banks' market-to-book ratio since the crisis is due to a loss in bank franchise value or profitability. In this paper we argue that banks' market-to-book ratio is the sum of two components: franchise value and the value of government guarantees. We empirically decompose the ratio between these two ...
Staff Report , Paper 567

Report
Caught between Scylla and Charybdis? Regulating bank leverage when there is rent seeking and risk shifting

We consider a model in which banking is characterized by asset substitution moral hazard and managerial underprovision of effort in loan monitoring. The privately optimal bank leverage efficiently balances the benefit of debt in providing the discipline to ensure that the bank monitors its loans against the benefit of equity in attenuating asset-substitution moral hazard. However, when correlated bank failures impose significant social costs, regulators bail out bank creditors. Anticipation of this action generates multiple equilibria, including an equilibrium featuring systemic risk, in ...
Staff Reports , Paper 469

Working Paper
Common Ownership Does Not Have Anti-Competitive Effects in the Airline Industry

Institutional investors often own significant equity in firms that compete in the same product market. These "common owners" may have an incentive to coordinate the actions of firms that would otherwise be competing rivals, leading to anti-competitive pricing. This paper uses data on airline ticket prices to test whether common owners induce anti-competitive pricing behavior. We find little evidence to support such a hypothesis, and show that the positive relationship between average ticket prices and a commonly used measure of common ownership previously documented in the literature is ...
FRB Atlanta Working Paper , Paper 2019-15

Report
Who Pays the Price? Overdraft Fee Ceilings and the Unbanked

Would a cap on overdraft fees increase financial inclusion? Studying an event in which state-level caps were relaxed for national banks, we find that caps constrain the supply of overdraft credit and deposit accounts. Absent caps, banks charge customers more for overdraft but bounce fewer checks and reduce required minimum deposits. Low-income households are both more likely to open accounts and less likely to lose them, suggesting they prefer being banked despite higher overdraft fees. Overdraft fee caps thus hamper, rather than foster, financial inclusion.
Staff Reports , Paper 973

Working Paper
Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom

An expansion in mortgage credit to subprime borrowers is widely believed to have been a principal driver of the 2002–2006 U.S. house price boom. By contrast, this paper documents a robust, negative correlation between the growth in the share of purchase mortgages to subprime borrowers and house price appreciation at the county-level during this time. Using two different instrumental variables approaches, we also establish causal evidence that house price appreciation lowered the share of purchase loans to subprime borrowers. Further analysis using micro-level credit bureau data shows that ...
Working Papers , Paper 2013

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